Virtually every one of my consulting engagements begins with the advisor/client asking if I've read The E-Myth. Then as I work with them, my clients...

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Virtually every one of my consulting engagements begins with the advisor/client asking if I’ve read The E-Myth. Then as I work with them, my clients are usually quick to point out when any of my recommendations stray even slightly from Michael Gerber’s treatise. I have to admit, it does get a little old. Don’t get me wrong, I’m a MichaelGerber fan. In fact, much of my consulting parallels the various elements of the business management strategy he details in his book and its sequels which all you MBA grads know as basic business management principles. Yet I do have one big problem with The E-Myth. It leaves the reader with the impression that they should undertake all the projects he suggests–write a big business plan, create an organizational manual, project an org chart, draft a hiring plan, set financial measures and goals–all at one time.

In my experience, this causes many advisors to severely slow the growth of their practices as their time and energy is channeled into what turns out to be a great deal of work, and away from attracting new clients. It also encourages a focus on margins, revenues, profits, and growth rates, which are more often the symptoms, not the problems. I find it’s more effective to build a practice on the four elements of a sound foundation, but only addressing each one when a firm needs, and can afford, to do so. Done right, the financials will take care of themselves. And by thinking about building their practice as a step by step process, my clients better understand why they’re taking each step, and can focus their resources to accelerate their growth, not slow it down.

Think of it as a pyramid with the most important block at the base. Starting from the bottom up, there’s Human Capital, Operations, Client Services, and Financial Management. Each has to be successfully developed before you can work on the next block, and you don’t start working on the next block until your firm has reached sufficient size and revenues to need and afford it. This way, the growth of your firm is driving its development so revenues can continue to grow and profits aren’t severely undermined by investment in the next level.

The base of this pyramid and of an advisory practice is human capital. At about $150,000 in annual revenue most practices should start thinking about hiring administrative help. Alone an independent advisor usually struggles to grow beyond $250,000 or so in revenues. If you want to grow beyond that, you’ll want to leverage yourself with administrative help before you reach that barrier. If you wait too long, your revenues will plateau while you recruit and train help. If you hire someone too soon, you’ll be paying for work you still have time to do yourself, and profitability will suffer.

When you get to revenues of about $150,000 start thinking about how admin help can leverage you to work with existing clients and to spend more time attracting new ones (where the growth of your firm will come from). Start the recruitment process and conduct interviews. And spend time figuring out what you can do to add the most value to your “firm” and what tasks and duties you can hand off.

Think about what tools–computers, phones, specific software, online resources, training, outsourcing–they’ll need to maximize their leveraging of you. Technology offers very cost-effective leverage, so don’t be stingy about cell phones, PDAs, additional software, networks, wireless connections, web-based tools, or laptops to work from home. Don’t waste money, but anything that will make your assistant more productive, which makes you more productive, is usually money well spent.

At this point, it’s essential to resist the temptation to start writing and working all those plans and documents that Michael Gerber writes about. You don’t need them yet, and you don’t have time to work on them anyway. Wait until after you’ve hired your admin assistant. Then your training of them on the tasks they’re taking off your desk will become the basis of your operations manual. But don’t write it yourself; have your assistant do it. Documenting your firm’s procedures and systems from your instructions is part of his education. Review what he writes and make suggestions, but he’ll learn much faster and more thoroughly if he actually has to write it all down. And there will be no question that you’re both on the same page.

When your firm reaches $350,000 in revenue, it’s time to start thinking about hiring professional staff. Admin staff can only go so far to increase your leverage, which after all is their function. Delivering comprehensive financial advice is labor intensive, and each new client requires a significant about of work that can only be done by a financial advisor. To take your firm to the next level, say beyond $500,000 in revenues, you’re going to have to leverage yourself professionally as well as clerically. That means hiring a support advisor.

Support advisors are typically young planners or career changers new to the profession. Their job will be to leverage you by taking the behind-the-scenes planning work off your desk: writing financial plans, creating and monitoring portfolios, reviewing insurance policies and retirement plans, tracking down documents, coordinating with accountants and estate attorneys, etc. A good support advisor will do the myriad tasks required for comprehensive client service, freeing you for regular client meetings and attracting new clients.

Recruiting and training a support advisor will take considerably longer than filling a clerical position, so you have to start the process long before your growing client work starts to take time away from your rainmaking efforts. At the same time, bringing in another professional, even a junior one means that it’s time to start thinking strategically about your firm. To recruit another professional, you need to be able to tell her not only what her current roll will be, but where the firm is growing and where she can go with it.

That means it’s now time to consider your firm’s strategic plan, projected organization chart, and hiring plan: that is, where you want your firm to go, what human capital you’ll need to take you there, and a schedule that will tell you when to add each new person. Do to this, you’ll have to make some decisions about what you want out of your firm (job, lifestyle, income, exit) and what kind of a firm you want (solo, silo, small ensemble, big firm). It’s at this point that many firms decide they need consulting help to sort through these issues and formulate a plan for the future.

By the time a successful firm reaches $600,000 in revenues, it typically has a support advisor, a few staffers, and a clear view of where the owner wants to go. So far, its steady growth has come from bringing in all the new clients it could get, which is as it should be. Many marketing consultants will disagree with me but until a firm reaches this point, it’s just not realistic to have target clients or try to attract the larger clients that most advisors would prefer.

But now it’s time to start thinking about maximizing resources and marketing efforts by focusing its services on a target clientele. This is the point to initiate Gerber’s analysis of client segments: look at your current client base by size, profitability, age, source of income, profession, potential, etc. Now’s the time to conduct client surveys to see how they feel about your current services and what additional services they’d like to have. And it’s time to assess the core talents of your team, what services you can deliver, and what services you’ll need to add to attract more of the clients in what should be emerging as your target niche. Rather than set in stone from day one, the target client base of an advisory firm evolves as the firm grows. Once it reaches this critical mass, the firm’s growth will increasingly depend on its ability to focus on and reach a clearly defined target market.

And finally, as an advisory firm starts to approach $1 million in revenue, it’s time to start thinking about it as a real business, not just as a group of clients. It may even help to think about your firm as you would any investment proposal. If a client brought you the opportunity to invest in your firm, how would you analyze it and what would you tell them? How good is the quality of its services and the people who deliver them? What’s its current penetration of its target market and what are its prospects for expanding. Where else will future growth come from? How does it stack up against its competition? What do the financials look like: the margins, the trends, the profits, and the return on equity? Is this truly a solid, growing business and how could it be better? How much is this firm worth to an outside buyer?

If you’ve built the first three blocks of your practice successfully and at the right time, this final view will be very positive, indeed. A sound business drives good financials, not the other way around. At some point, many firms bring in professional management to think strategically about how to make the answers to these investment questions even better, starting at the bottom of the pyramid, and work their way up again: How can we improve our human capital? How can we deliver better client services? How can we expand our target market? And finally, how good is our firm as a business?

Angela Herbers is a virtual business manager and consultant for independent financial planning firms. She can be reached atangieherbers@cox.net.

Angie Herbers

Angie Herbers is chief executive and senior consultant at Herbers & Co., an independent management strategy consultancy for financial advisory firms. She can be reached at www.HerbersCo.com.

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